There are many bad things that flow from the highly unequal distribution of income in the United States but there is one positive: you know where to look for tax revenue to fund our depleted social support system. Or if you want to address some of the inequality itself.
Both Bernie Sanders and Elizabeth Warren made proposals during their presidential campaigns that built on this reality. Warren’s best-known proposal was her wealth tax, while Sanders attacked the intergenerational transmission of inequality by proposing a much more robust estate tax than currently exists. During the Democratic primaries, Joe Biden did not support either of these proposals. But as a candidate of a party that has moved to the left over the last decade or more, he has put forth several tax proposals that speak, at least in part, to the problem of economic inequality in the United States. His proposals address both the current level of inequality as well as the intergenerational transmission of economic privilege.
It has been widely recognized that the FICA, the payroll tax that funds Social Security as it is currently structured, is outdated. FICA is not raising enough revenue to insure that, over the long term, Social Security will continue to be fully funded. And this is, in large part, because of increased income inequality. In 2020 FICA applies to only the first $137,700 of income received. Here is the problem. Although the annual FICA cap rises with inflation, it doesn’t rise fast enough to keep up with increasing income concentration. Thus, while the 1980 FICA cap of $25,900 captured over 90% of all income received, the 2020 cap captures less than 83% – over $1.2 trillion of income escapes the FICA tax – and that threatens the system.
Biden is proposing to tax all income received above $400,000 (in addition, of course to the current first $137,700). This would raise between $800 billion to $1 trillion new revenue over a decade. While it obviously creates a doughnut hole between the current cap and $400,000, it would significantly increase FICA coverage.
Capital gains, the amount above your cost that you sell an asset such as stocks for, have been taxed at a lower rate than income for many decades in the Unites States. The argument has been that investors should be rewarded for deferring consumption and taking on risks, that lower capital gains taxes would generate faster economic growth and ultimately benefit everyone. However, the primary beneficiaries have been the top 1-5% of households by income.
This is true on two counts. First, the vast bulk of capital gains, about 70%, goes to the top 1% of households by income while less than 10% goes to the bottom 80% of households by income. Second, since the highest income households in the United States receive a large share of their total income in the form of capital gains (and pass-through income, taxed at the capital gains rate), many in the very top income level pay a lower effective income tax rate than households lower down the income hierarchy. Finally, the low capital gains tax rates that benefits primarily high-income households leads to a further concentration of wealth and greater wealth inequality.
Biden proposes to tax capital gains at the same level as income for all households with total income in excess of $1 million (households below this level would still benefit from the lower capital gains tax rate). This proposal would raise $400-550 billion in new revenue over a decade. It is also smart politics, since households with small amounts of capital gains often value that small income and its lower tax rate – and they would still have that benefit. The constituency for resisting this proposal would be limited to a relative few, the roughly 500,000 households with income in excess of $1 million out of a total number of tax filing household of more than 150,000,000. Of course, these households have a lot of money to lobby against such a proposal.
Stepped up basis is an often overlooked piece of the tax code that provides huge benefits to the heirs of the very, very wealthy. In terms of the intergenerational transmission of wealth and the creation of a hereditary plutocratic aristocracy, it is probably more important than our weak estate tax.
It works like this. Suppose someone buys stocks valued at $10,000 when they are young and, because they are either very lucky or very good at stock picking, upon their death, the stocks are now valued at $1 million. There is no tax owed on the huge gain in value and their heirs now have an effective purchase price of $1 million. Under current law, the heir(s) would only pay capital gains tax on and additional gains beyond the “stepped up basis” of $1 million. And, of course this process could continue across generations. For the huge fortunes of families like the Waltons and the Gates, or heirs of wealthy individuals such as Jeff Bezos or Elon Musk, this is a completely unearned windfall.
Biden proposes to end stepped up basis across the board. Passing such legislation is going to be a very heavy lift, but one that we all should support. This measure would raise $40 billion annually – and maybe more if the increased concentration of wealth grows.
A very large portion of the money that Biden’s tax proposals would raise comes from raising the corporate income tax rate to 28%. OK, but it was 35% just 10 years ago. This is a partial reversal of the Trump reduction in corporate tax rates but we can and should go further.
In 1952, corporate income taxes generated almost 1/3 of total federal revenue; today they account for less than 10%. And there are large and profitable corporations – such as GE, Boeing and Verizon – that have gone for many consecutive years without paying ANY tax at all to the federal government. Biden would also eliminate the loss-carry-forward provision that, among other outrageous things, allowed Amazon to pay NO federal taxes in 2018 – a year in which they netted $11.2 billion.
Biden proposes a top rate of 38.6%. Well, this is a step – but only a small step – in the right direction. From 1930 when Hoover raised the top individual income tax rate to 63% until 1986, the top rate was never below 50% and, until 1981, never below 70%. With these “confiscatory” rates we recovered from the Great Depression and successfully fought WWII. We also had a real GDP growth rate above that of the last two decades, when neoliberals claimed the wealthy needed the incentive of keeping more of their ill-got gains to induce them to invest.
Just as is the case in taxing high income receivers more to support Social Security, so here there is solid evidence that higher top rates would not constrain growth. In fact, with more resources to invest in education, health care and the necessary transition out of a fossil-fuel-based political economy, our GDP growth rate would, in all likelihood, be higher than the last 13 years of below 3% annual real GDP growth and would certainly be more equitably distributed.
The good principle underlying Biden’s tax proposals is the recognition that the tax system is unjust and needs to be corrected. That will give progressives of various stripes a base from which to build. I think the key tax policy building block should be a wealth tax to counter the creation of enormous fortunes in the hands of one individual or family. These fortunes are the roots of growing inequality and the rise of a plutocratic oligarchy. The exact level can be debated, but the principle should be that articulated by Teddy Roosevelt in support of the estate tax but this time applied during the lifetime of the wealthy rather than only at their deaths.
The really big fortune, the swollen fortune, by the mere fact of its size, acquires qualities which differentiate it in kind as well as in degree from what is possessed by men of relatively small means. Therefore, I believe in a graduated income tax on big fortunes, and … a graduated inheritance tax on big fortunes…
Theodore Roosevelt, 1910